There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Hi Sun Technology (China) (HKG:818) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hi Sun Technology (China):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = HK$376m ÷ (HK$8.5b - HK$2.2b) (Based on the trailing twelve months to June 2020).
Thus, Hi Sun Technology (China) has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the IT industry average of 8.6%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hi Sun Technology (China)'s ROCE against it's prior returns. If you're interested in investigating Hi Sun Technology (China)'s past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Hi Sun Technology (China) Tell Us?
Hi Sun Technology (China) has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 6.0% which is a sight for sore eyes. In addition to that, Hi Sun Technology (China) is employing 93% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line
Long story short, we're delighted to see that Hi Sun Technology (China)'s reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 43% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
If you want to continue researching Hi Sun Technology (China), you might be interested to know about the 1 warning sign that our analysis has discovered.
While Hi Sun Technology (China) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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